Turkish sukuk growth seen strengthening MidEast ties

Interest in Islamic finance is on the rise in Turkey, bolstering its ties to the Middle East and paving the way for a new growth market for Islamic bonds.

Islamic bonds, or sukuk, are known as participation certificates. The four Islamic banks – AlBaraka Turk, Asya Katilim, Kuveyt Turk and Turkiye Finans – are called participation banks in Turkey, which is careful to preserve its secular stance on politics and finance.

But experts say that the country, which has long tried to gain entry into the European Union, is now finding that the Middle East may be a more lucrative and embracing partner, as well as a potential source of capital.

To that end, growing its relatively nascent Islamic finance industry is seen as a step toward further solidifying the relationship between Turkey and the Gulf.

“The emergence of sukuk in Turkey is a socio-political issue,” said Rizwan Kanji, senior debt capital markets attorney at law firm Norton Rose. “Turkey is now looking to align itself more to the Arab world than the West.”

Turkey’s first sukuk from lender Kuveyt Turk for a three-year, $100 million Islamic bond was oversubscribed last month by 45 percent by investors and showed diverse demand, a sign of a healthy appetite for Islamic paper from Turkey.

Kanji, whose firm advised on the offering, said Turkey, with its stable economy and proximity to the oil-rich Gulf nations, has the potential to emerge as a key player in Islamic finance.

“Turkey has become a pretty solid target for investors and the global economy to turn to,” he added.

Until recently, Islamic funds in Turkey were largely raised through the syndicated loans market, rather than sukuk.

“It’s a positive development to introduce a new instrument in the country that will develop the market,” said Afaq Khan, chief executive of Standard Chartered Saadiq.

While Khan said that more offerings out of Turkey would not mark a fundamental change in Turkey’s financial policies, it will serve to strengthen the ties already present between Turkey and the Middle East.

But from an industry perspective, an emerging Islamic finance market, like Turkey, may just be what the sukuk industry needs to sustain growth, experts say.

The global Islamic finance industry is expected to hit $1 trillion by the end of 2010, but sukuk issuances in the Gulf have lost some of their lustre in recent months amid a series of high-profile defaults and rising costs.

Turkish sukuk from highly-rated entities, could appeal to yield-hungry investors in the Gulf because Turkish investments tend to pay relatively attractive spreads in comparison to GCC spreads, said Malek Khodr Temsah, manager of treasury and investments at Bahrain-based Al Baraka Banking Group.

“While there are strong trade finance relationships between GCC lenders and Turkish borrowers, the mere lack of Turkey-based sukuk issues in circulation rules out the ability of Islamic banks globally to invest in Turkey via liquid investments,” he said.

In April, the Capital Markets Board of Turkey (SPK), the regulatory and supervisory authority in charge of the securities markets, published a statement laying down the legal groundwork for sukuk issues by Turkish companies.

But there are concerns that sukuk issues could be taxed at 15 percent – the rate levied on the interest on Turkish bank deposits – rather than the 10 percent levied on corporate bonds.

Al Baraka Bank’s Temsah said that Turkey will need to address the double taxation issues related to sukuk and the issuance of a sovereign sukuk would help establish a pricing benchmark for Turkish corporates looking to raise financing.